GAO: 3,700 Stimulus Recipients Owe Taxes

Federal law prohibits the IRS from alerting government contract officers to tax scofflaws.

More than 3,700 contractors and grant recipients failed to pay their federal taxes but received stimulus money anyway, according to a new report by the Government Accountability Office (GAO). They represent about 5 percent of all stimulus recipients.

Collectively, those tax scofflaws owe more than $750 million in unpaid federal taxes. Yet they received a combined $24 billion for work funded by 2009's American Recovery and Reinvestment Act, which was intended to aid the economy by creating jobs.

In reality, the actual number of recipients who owe taxes could be higher, according to the GAO, due to limitations of the data.

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"These cases raise questions not only about the integrity of government programs but also about fairness," said Gregory Kutz, director of the GAO's forensic audits and investigative service, during his testimony before a Senate subcommittee Thursday.

The results drew the ire of Sens. Carl Levin (D-Mich.) and Tom Coburn (R-Okla.), the chair and ranking member of that subcommittee.

"Tax deadbeats should not be getting taxpayer dollars," Levin said.

But they can and do. Federal procurement law does not prohibit the government from awarding grants or contracts to those who owe federal taxes.

In fact, the Internal Revenue Service is not even allowed to tell federal agencies whether a contractor has unpaid federal taxes. The only way that information gets shared is if a contractor has been specifically barred from receiving federal contracts, which is unlikely to happen without a tax evasion conviction.

The study only analyzed tax debts from 2008 and earlier -- meaning the stimulus recipients had active tax debts at the time they were handed federal money.

The study likely bolsters the case for a rule set to take effect in 2013 that requires federal, state and local governments to send 3 percent of the cost of contracts to the IRS. That policy is viewed as a way to force businesses hired by governments to comply with tax law, since they'd only get the 3 percent back upon making their payments.

State and local governments have argued against the rule, saying it would be too expensive for them to implement. But the GAO report will likely underscore the prevalence of delinquent contractors who get government business.

The GAO report focuses in particular on 15 unnamed stimulus recipients who were responsible for $40 million of the unpaid taxes. In many cases, those recipients failed to send payroll taxes that had been withheld from employees' paychecks to the IRS -- a practice Levin viewed as especially egregious, since it essentially robs employees' Social Security accounts.

One way the government tries to keep tabs on the situation is through a program that allows the IRS to collect delinquent taxes by witholding some payments owed by the federal government to those contractors. But half the recipients cited in the study were subcontractors who didn't receive money directly from the federal government. As a result, those withholdings were impossible to make.

Daniel Gordon, who leads the Office of Federal Procurement Policy, conceded that more work needs to prevent tax evaders from getting government money. He pledged to "leave no stone unturned" in that fight.

But Levin seems dissatisfied, insisting that the feds aren't using the debarment process frequently enough. He suggested the government also needs a policy that would require subcontractors to tell prime contractors whether they owe delinquent taxes.